In July ETF provider Ossiam listed its Shiller Barclays CAPE US Sector Value Index ETF on the London Stock Exchange, following the launch of a similar product tracking European shares in February. Both products track indices that use the cyclically adjusted price to earnings (CAPE) ratio developed by Nobel Prize-winning economist Robert Shiller to identify undervalued securities.

Financial News spoke to Ossiam chief executive Bruno Poulin about the US ETF launch and the wider smart beta market.

Financial News: What explains the popularity of value investing when it comes to ETFs?

Bruno Poulin: Value investing has been around a long time, with some of the funds in the US market dating back to the 1950s and amassing tens of billions in assets. It’s well established, it’s big and it means something to investors, even if the methodologies it encapsulates are very different. It has also performed over a long period and, as a consequence, you have the research to explain why it performs.

What does smart beta bring to value investing?

Because you have several schools of thought in value investing, if you look at the active funds and indices you won’t find a great correlation between them. It is like what we call in French l’auberge espagnole – a restaurant to which you may bring any meal. The methodologies are so diverse because there is no single definition of value.

Smart beta, though, because it is all about transparent portfolio construction, defines very precisely for investors what they are getting. You can show how you are going to weight sectors or stocks; how you avoid concentrations in stocks or sectors; whether it is relative or absolute value; and what period of time you measure over.

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For any smart beta product, though, you first need to be convinced by the methodology, and that’s what the CAPE has: it has been studied extensively in the US and Europe. A lot of those who are now investors went to school, learned finance and worked in finance with Shiller; they are followers of Shiller and are already convinced by the theory.

Can you explain briefly how the ETF works?

In a nutshell, it’s a cyclically adjusted long-term relative-value strategy at the sector level. It starts with the price-to-earnings ratio, but the trick is that the CAPE is cyclically adjusted so it uses the 10-year inflation-adjusted average. The whole point for Shiller is that to be a real value investor, you need to do it over the investment cycle. To make sectors more comparable, since some sectors continually trade at relatively low or high CAPE ratios than others, it uses “relative CAPE”. This is calculated by dividing a sector’s current CAPE ratio by its 20-year historical average.

It uses sectors to avoid a mix of systematic and idiosyncratic risks, one of which is the value trap, where a stock is in fact distressed – not undervalued – and will never recover. Then, because the value trap can also affect sectors, it uses a momentum screen: of the five most undervalued sectors selected according to the CAPE, we remove the one with the lowest momentum in the previous 12 months. Rebalancing takes place every month.

What launches can we next expect from Ossiam?

We’ve just launched the US product and we’re exploring, with Shiller and Barclays, other geographical zones.

However, because it’s a long-term strategy, the index requires a very long-time series of data and that’s not something you can replicate in all cases, such as emerging markets. But we are considering other developed markets where we can launch similar indices.

More widely, there is a lot of focus on factor investing at the moment, and some refinement of value strategies, with new value indices that are a bit more complicated. That’s not always so palatable for investors, though, as they’re not easy to explain, whereas investors are already acquainted with Shiller.

There’s a lot of focus on actively managed ETFs and products combining factors. I’m not convinced that you can have one product that fits everyone, however. Investors have to take the responsibility of allocation.